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Growth Spurt

Hawaii’s hospitals are building big time

July, 2004

Ten years ago, Wahiawa General Hospital was at a crossroads. While it was state-of-the-art when it opened in 1944, the building had not changed much in 50 years. Neither had the hospital attracted patients from the growing nearby Mililani community. Knowing that health-care trends increasingly favored outpatient care, the hospital association proposed a radical solution: the Pacific Health Center, a 210-acre medical mall with a core hospital, surrounded by separate buildings ranging from specialty clinics to centers for diagnostics, office buildings and sports fitness facilities.

“When we gave our presentation, one of our board members asked, ‘What kind of stuff have you been smoking?'” laughs Dr. Edmund S.M. Whang, the hospital’s board chairman. However, he says, there was a method to the madness: “In a changing community, with changing demographics, medical needs keep changing. If you have a modular concept – a mall with separate units – you can more easily respond to the needs of the community.”

While not all hospitals have pursued such a radical tack, aging facilities, coupled with new technologies, availability of financing and increased patient demands have converged to fuel widespread construction. As of mid-May, Hawaii’s major hospitals reported construction projects totaling almost $750 million in the pipeline, from parking-lot expansions to new hospital buildings. The $404 million Pacific Health Center-a three-phase, 10-year project scheduled to start next year-comprises the majority of that amount, followed by the $200-million Queen Emma Tower expansion at the Queen’s Medical Center. Leslie Morse, project manager for clinical program planning, says Queen’s was faced with the same challenges as Wahiawa General: “The last major construction for patient care was in 1985. Some of our facilities have been up since 1922. So it’s an aging campus, and we need to keep up with patient demand as well as space requirements.”

In addition to these large projects, Kaiser Permanente has a total of $42 million budgeted for two clinics under construction, and Hawaii Pacific Health has several, relatively smaller jobs comprising a total of $40 million across its four hospitals. Hawaii is not alone. A survey by the Healthcare Financial Management Association and GE Healthcare Financial Services reported that 75 percent of U.S. hospitals say they plan to boost capital investment, raising capital spending by 14 percent annually over five years.

Maui Memorial Medical Center chief operating officer Wesley Lo says that hospital construction during a boom is not the ideal situation. “In a perfect world, this would be the worst time to have construction, when it’s busy, because it drives up your costs,” he says. Still, Lo and other hospital executives say they could not afford to wait. Says North Hawaii Community Hospital Chief Executive Officer Stan Berry: “I think we’re barely staying ahead of the demand curve. If you’re going to build a new tower, you’d better build it to be usable for the next 10 to 15 years, because you’re not going to build a new one every five years. It’s a long process, probably a three-year deal, to do a major expansion. You don’t want your facilities to be full on the day you open.”

POPULATION GROWTH, AGING DEMOGRAPHICS

Marcy Aquino, Kaiser Permanente’s Leeward Oahu area manager, says that’s a familiar scenario. “We’re bursting at the seams. Many people (at Kaiser) have home offices, because there’s no place to have offices in the buildings. I’m one of those people who gets an office and it goes away, because patient care comes first,” says Aquino. One reason is population growth. From 1990 to 2000, Oahu’s population grew by 5 percent, but communities such as Waialua grew by 22 percent, and Ewa by 18 percent. That rate is projected to increase statewide, according to the Department of Business, Economic Development and Tourism. Between 2000 and 2015, the state’s population is projected to increase by 11 percent, with Oahu projections at 9 percent, and the Neighbor Islands at 16 percent. Fueling the need for more health care is the growing percentage of older residents. “The over-65 population comprises a higher percentage than ever. Statewide it’s 11.5 percent; nationally, we’re not expected to hit that level until 2010,” says Lo.

Meanwhile, the Balanced Budget Act of 1997 restricted Medicaid and Medicare reimbursements over the past few years, leaving hospitals to deal with limited revenues as labor, equipment and other expenses continued to grow. As a result, many hospitals delayed capital-improvement projects. Dr. Randall Suzuka, chair of the Wahiawa-Central Oahu Health Center, says hospitals have not kept up with the population: “When I was looking at the demographics, 40 percent of the population on this island lives west of Red Hill. But if you look at the distribution of hospital beds, only 17 percent are on this side. It doesn’t seem fair in terms of having equitable access.”

However, with outpatient care and new technologies becoming more widespread, some aging hospitals are finding that a simple renovation may not be enough.

NEW TECHNOLOGIES

That’s what happened at Wahiawa General. Whang says, “The cost to renovate the hospital was higher than the cost to build a new facility.” Joel Yuen, president of engineering firm Cedric D.O. Chong & Associates, says that hospitals are caught between conserving their resources and remaining competitive. “Hospitals are kind of pressed – no one wants to do upgrades, because they cost a lot of money, but you can’t have state-of-the-art technology with a run-down building,” says Yuen.

It’s another nationwide trend. The Healthcare Financial Management Association says that nearly 50 percent of 460 chief financial officers surveyed nationwide said their facilities are deteriorating and depreciating faster than they can make improvements. More than half say they need to buy computerized physician-order entry systems (64 percent), and digital radiology systems (72 percent), increase emergency-department capacity (51 percent) and operating-room capacity (50 percent). According to North Community Hospital’s Berry, “Part of it is you have to stay competitive and you’ve got to have the right equipment and the right facility. On the other hand, maybe some of the hospitals put it off to the point where they couldn’t put it off any longer.”

Technological trends such as minimally invasive surgery and the widespread use of diagnostic equipment such as MRIs, along with infrastructure improvements to facilitate communication, such as telemedicine and Internet connectivity, have also led to more construction.According to Morse, of Queen’s Medical Center, “For minimally invasive surgery, incisions are smaller, but the equipment is bigger. Technology is moving rapidly, and our current infrastructure doesn’t support that growth. With the new technology, we need to determine how to configure the space to make it more efficient and accessible to patients.”

Hospitals left behind the curve will suffer, according to Walter Muraoka, an architect who has worked with both Kaiser and Hawaii Pacific Health. Muraoka says, “Competition is great because people have a choice, starting with the boomer generation-and they’re demanding more.”

AVAILABILITY OF FINANCING

Thanks to an improving economy and low interest rates, various forms of financing are more accessible for hospitals than they have been in recent years. In at least two cases, delays in financing worked out for the better. Kaiser Permanente postponed its Waipahu clinic expansion in 1999 when its national office issued a moratorium on construction due to shrinking membership in other states. That one-year break gave Kaiser time to realize that patient demand required more than double its existing space. The organization then purchased land and built the 87,000-square-foot Waipio Clinic.

Likewise, Maui Memorial Medical Center Chief Executive Officer John Schaumberg says the hospital wanted to expand its facilities in 2000, but was deterred when the Legislature failed to release the required revenue bond-essentially a loan based on revenue projections, for which the hospital would have had to repay both principal and interest. Two years later, Schaumberg says, the Legislature needed to fund construction projects to spur the economy, and issued a $38-million, general-obligation bond, which did not require repayment. “Essentially, it was a grant from the state,” says Schaumberg.

For Hawaii Pacific Health, the completed merger of the four hospitals gave the organization more resources, and an incentive to standardize its facilities, according to vice president for design and construction Warren Chaiko. “As a merged entity we’re in a stronger position to engage in an aggressive capital expansion program. The combined growth and stability of our four hospitals has allowed our organization to access financing and generate the revenue needed to keep pace with these investments,” he says.

To reduce future expenses and generate revenues, some hospitals are choosing to own land and collect lease rents from developers. According to Whang, “One thing we learned is not to put money into bricks and mortar. We’ll have others build the structures, so we don’t have the expenses of renovation or repair in the future. For us, the solution (to generating more income) will be to own land and lease it.” North Hawaii Community Hospital is taking the same tack with its five-year plan to build medical offices, says Berry, “Our preference is really to work with a developer. We’d probably do a land lease to either physicians or a physician developer and let them actually build the offices.”

IMPACT ON COST OF SERVICES

Some critics have said that the focus on generating revenues will restrict access to care, particularly for the poor and uninsured. Hospital executives disagree, for two reasons: one, insurance companies determine reimbursements, which translates to revenues for hospitals, and two, capital improvements are financed over the long term. According to Suzuka of the Wahiawa-Central Oahu Health Center, “Medicine is the most highly regulated industry in the United States; it’s not like any other industry, where you set your price. Basically, in medicine, you have to live within the cost structure, so Pacific Health Center would not be paid any higher reimbursements than Queen’s or Kuakini or anybody else.”

With interest rates on tax-exempt bonds at less than 4 percent, not only is it easier to fund future projects, the expense of serving existing debt is reduced. Says Berry, “It shouldn’t affect the cost of services, because basically the financing that we’re acquiring pays back over a 30-year period. And because interest rates are so low, we’re able to refinance existing debt and acquire more debt so we have money for capital-investment purposes.”

In the long term, hospital executives say the improvements from construction will create efficiencies that will reduce costs and increase access to healthcare. According to Whang, “The critical point is efficiencies. Since we’re receiving a fixed amount (in Medicare and insurance reimbursements), by becoming more efficient, you hold on to more of your money, and deliver better patient care, which is the ultimate goal.”